Can a Buyer Cancel a Real Estate Purchase Contract in Korea After Paying a Deposit?

Short Answer

Sometimes. Under Article 565 of the Korean Civil Act, a buyer may generally terminate a real estate purchase agreement by expressly giving up the contract deposit, while a seller may generally terminate by offering to return twice the amount of the contract deposit received.

This deposit-based termination mechanism is generally available only if the parties have not agreed otherwise and neither party has commenced performance.

The result may be different where only part of the agreed deposit has been paid, the contract contains a separate termination or damages clause, either party has commenced performance, or the buyer is relying on the seller’s breach rather than a no-fault withdrawal right.

Paying a deposit therefore does not give the buyer an unlimited right to walk away from a Korean real estate transaction.

What Is a Korean Contract Deposit?

A contract deposit is commonly paid when a real estate purchase agreement is signed in Korea.

Depending on the agreement and circumstances, it may serve as a statutory termination deposit, a payment toward the purchase price, or, where separately agreed, part of a contractual damages arrangement.

Its precise legal effect depends on the wording of the agreement and the parties’ conduct.

A Korean contract deposit should not automatically be assumed to operate in the same way as earnest money or a deposit under the buyer’s home-country law.

Can the Buyer Always Walk Away by Giving Up the Deposit?

No.

Article 565 generally ceases to be available once either party has commenced performance.

The buyer must also actually exercise the termination right. Simply deciding not to proceed or refusing to make the next payment should not be treated as the same thing as properly terminating the agreement under Article 565.

The buyer should therefore confirm both whether the statutory termination right still exists and how it should be exercised before taking further action.

What Does “Commencement of Performance” Mean?

This is often the most important issue.

Under Korean case law, commencement of performance is fact-specific. It can include an objectively recognizable part of contractual performance or a necessary prerequisite to performance.

Mere internal preparation may not be enough, but complete performance is not required either.

Depending on the transaction, relevant acts may include payment of an agreed interim installment, delivery of certain documents required for performance, or another concrete act forming part of the contractual obligations.

The result depends on the contract and the nature and purpose of the transaction.

Can Performance Begin Before the Scheduled Payment Date?

Potentially, yes.

A buyer should not assume that the Article 565 termination right necessarily remains available until the contractual interim-payment or balance-payment date.

Performance may, in principle, commence before the scheduled payment date.

However, the result can differ where the contract or circumstances indicate that the agreed payment date was intended to protect both parties against early performance or to preserve the deposit-based termination period until that date.

The analysis therefore depends on the contract terms, purpose of the payment schedule, and conduct of the parties.

What If Only Part of the Agreed Deposit Has Been Paid?

This requires particular caution.

Suppose the parties agree that the contract deposit will be KRW 100 million, but the buyer initially transfers only KRW 10 million.

The buyer should not assume that giving up the KRW 10 million automatically allows the buyer to terminate the transaction.

Korean Supreme Court decisions distinguish between the principal purchase agreement and the deposit arrangement. Where the agreed contract deposit has not been fully delivered, the Article 565 deposit-based termination right may not yet have arisen.

Similarly, the seller generally cannot assume that returning twice the amount actually received is sufficient where that payment represented only part of the agreed deposit.

A separate termination, default, or damages provision in the contract may lead to a different analysis.

What If the Buyer Simply Changes Their Mind?

A change of mind does not by itself create a right to terminate a binding purchase agreement.

The buyer may potentially terminate under Article 565 by expressly giving up the contract deposit, but only if the statutory requirements remain satisfied and the contract does not provide otherwise.

If Article 565 is no longer available, refusing to complete the transaction may instead constitute a breach of contract.

The consequences would then depend on the agreement and the ordinary Korean-law rules governing contractual non-performance.

What If the Buyer Cannot Obtain Financing or Transfer Funds to Korea?

This issue is particularly important for foreign buyers.

Difficulty obtaining financing, transferring money internationally, satisfying bank requirements, or completing foreign-exchange procedures does not automatically excuse the buyer from performing the purchase agreement.

However, the result may be different if the agreement expressly makes financing approval, foreign-exchange approval, regulatory permission, or another specified funding event a condition to completion.

Whether a clause actually creates a contractual condition or merely describes the buyer’s intended source of funds depends on its wording and the surrounding circumstances.

For this reason, a foreign buyer who depends on financing or international remittance should address that risk in the purchase agreement before signing.

What If the Seller Has Breached the Agreement?

This is legally different from simply changing one’s mind.

If the buyer seeks to terminate because the seller has materially breached the agreement, the buyer may need to rely on the ordinary rules governing termination for breach, rather than Article 565.

Examples may include:

• refusal or inability to transfer valid title;
• failure to remove agreed mortgages or other encumbrances;
• failure to satisfy an agreed completion condition; or
• a material breach concerning possession or existing tenants.

Termination for breach can raise separate issues concerning notice, an opportunity to cure, restitution, and damages.

The buyer should therefore identify the legal basis for termination rather than simply stating that the deposit is being forfeited.

Is the Buyer’s Maximum Loss Always the Deposit?

No.

The buyer’s maximum exposure is not necessarily limited to the amount already paid.

The contract may contain a separate damages provision, and failure to complete the transaction may result in damages beyond the deposit depending on the contractual terms and legal basis of the claim.

Under Korean law, contractual provisions commonly described as a “penalty” may also require analysis as a pre-agreed amount of damages or, in some circumstances, a true contractual penalty.

This does not mean that the seller can automatically keep the deposit and recover unlimited additional damages.

The available remedies depend on whether the agreement was terminated under Article 565, terminated for breach, or governed by a separate contractual damages provision.

Are the Rules Different for a Foreign Buyer?

The basic contractual analysis under Article 565 generally applies regardless of whether the buyer is Korean or foreign.

A foreign buyer may, however, face additional practical issues involving foreign-exchange procedures, overseas remittances, bank compliance, translations, authentication of documents, and regulatory approvals.

Those issues do not automatically change the buyer’s contractual payment obligations unless the purchase agreement provides otherwise.

This is why foreign buyers should coordinate the contractual payment schedule with the practical requirements for transferring and documenting funds in Korea.

What Should the Buyer Check Before Terminating the Contract?

Before sending a termination notice or refusing to make the next payment, the buyer should review:

• whether a binding purchase agreement was formed;
• the agreed amount and legal character of the contract deposit;
• whether the full agreed deposit was actually paid;
• whether either party has commenced performance;
• whether any interim payment has been made;
• the contract’s termination and damages provisions;
• whether the seller has breached the agreement;
• whether financing, regulatory approval, or remittance was made an express contractual condition; and
• what notice or other procedure is required.

Timing can be critical because the parties may continue taking steps toward performance while the buyer is considering termination.

Conclusion

A buyer may be able to terminate a Korean real estate purchase agreement by giving up the contract deposit, but paying a deposit does not create an unlimited right to walk away.

Under Article 565 of the Korean Civil Act, the deposit-based termination mechanism generally applies only where the parties have not agreed otherwise and neither party has commenced performance.

The analysis becomes more complicated where only part of the agreed deposit has been paid. A buyer cannot safely assume that forfeiting only the amount actually transferred will terminate the agreement.

The buyer may also have separate rights where the seller has materially breached the agreement, while financing or international remittance problems generally do not excuse non-performance unless the contract provides an effective condition addressing that risk.

Before sending a termination notice or refusing to make the next payment, the buyer should therefore review the agreement, payment history, stage of performance, termination provisions, damages provisions, and any financing or regulatory conditions.